I recently had a brief phone conversation with a long term client. This client had called me to discuss its difficulties in getting paid and its difficulties in making its payments. They wanted my help in figuring out how to deal with both those they owed and with those who owed them.
I suggested a Zoom meeting, to which they bring all documents relating to all those to which this company owed “substantial” money and to all those that owed this company substantial money. I have modified the facts a bit to disguise the specific company, but the substance is all there.
Nine companies owed my client amounts ranging from around $25,000 to $500,000. About half were in the US, half were in Asia. My client owed around 40 companies amounts ranging from around $1,000 to $100,000. About 75% of these debts were to Asian companies (mostly Chinese, Korean and Indian companies), with the other 25% (all small) nearly all owed to US, EU or Canadian companies.
We went through the receivables first and decided I would call or write all ten companies right away. Within a few weeks, all of the American companies had either paid, or, in one case, signed a pretty much airtight promissory note to pay within three months, with non-payment leading to a quick judgment, along with default interest and attorneys’ fees. We also took a security interest so that even if this company files for bankruptcy, my client will have some priority. We are still in the process of negotiating with a number of the Asian companies and plotting strategies if negotiations fail.
What we did with the payables is more interesting.
I asked the client why so many of its payables were to Asian companies when I’d always thought that less than half its business involved Asia. The client responded by saying that I was right about their business, “but the Asian companies just “didn’t bug us nearly as much to get paid and we don’t think they will ever sue us.” We then started examining the payables and ranking them in terms of contract quality. In other words, of these approximately 40 creditors, how did they rank in terms of the strength of their contracts.
By this ranking, the bottom twenty or so companies — the companies with terrible/no contracts were all Chinese or Indian companies .
We then talked about how many of these companies had made any real effort to collect. A bunch of the Korean and American companies had retained lawyers who had written demand letters. The letters for the Korean companies (all in English) came from Korean lawyers in Korea and Korean lawyers in Los Angeles, none of which we believed would be able to sue my client quickly. We decided I would contact the Korean lawyers to work out payment deals, which I subsequently did. The few Japanese to which my client owed money were deemed by the client too important not to pay and so we agreed that the client would contact them, explain the situation, and start paying.
Not a single Chinese company had yet retained a lawyer and I explained to my client my firm’s history in trying to represent Chinese companies owed money in the United States. I told him of how Chinese companies expected my firm to take on these sorts of cases on a 5% contingency fee basis, with my firm paying all costs, and, believe it or not, sometimes even requesting we guarantee full payment. I told him how we had successfully handled a number of business collection cases for EU, Latin American, Korean, Russian, and Japanese clients over the years, but had not once even taken one on for a Chinese company. I mentioined that we were in talks with a number of Chinese companies that are each owed millions of dollars by American companies, but none of them are willing even to pay the advance fees necessary to bring a lawsuit, even though these lawsuits usually result in quick settlements.
A few years ago, I received an email from a savvy Chinese national attending law school in the United States. This law student wrote this email to a lawyer in China who had contacted him regarding their working together to collect debts on behalf of Chinese companies. The translation of that email is as follows:
What does the contingency fee option look like? The biggest issue is of course the percentage that the attorney can deduct (both attorneys fees and costs, i.e. court costs, travel, etc.). The typical arrangement is 30–35% of any recovery after deducting fees and costs for the attorney, and the rest for the plaintiff(s) if there is no appeal. In appeal situations, the attorney gets 40%, in addition to costs. These figures might sound alarmingly high, but they are the norm in the United States, and frankly, lawyers just put these figures in a contract as a matter of course, and there is hardly any bargaining.
With the above said, Chinese companies must adapt to the rules of the game in the United States to get competent counsel to collect their debt. My understanding is that most Chinese companies don’t want to advance court costs, and they want attorneys to retain 5%-10% of any recovery. Based on my knowledge and experience, U.S. lawyers/firms will absolutely not take on very risky representations with such a low percentage. Five to ten percent is not worthy of their time and efforts, and they might end up losing money after paying their overhead.
I am sending you this note not to educate or offend you — not at all. Rather, I think that in order for the vast number of Chinese companies to have a chance of getting their money back and to fight back when wronged, they must know the rules of the game and play by them over here. And they must not insist that the rules here be the same as in China; otherwise, they lose money rightfully belonging to them, and a chance to get it back through competent representation in the courts. Since you are, apparently, leading the efforts in debt collection, I think it is important that you start informing your Chinese company clients what is reasonably expected over here by U.S. attorneys in terms of percentages, so that they don’t overlook collection of their money entirely simply because U.S. lawyers demand more in their contingent fee agreements.
The Chinese lawyer wrote a very short email back to this law student explaining that he had met with a number of his Chinese company clients owed money by American companies and none of them would be willing to pay more than 10%. I can vouch for the fact that very little has changed in the last few years.
My client decided they would not pay any of the Chinese companies unless and until the company got flush again. I did not question them on this decision. The truth is that if your company owes money to a Chinese company (and Sinosure does not get involved), your company probably should put its Chinese debtors last in line for payment.